viewFalcon Oil & Gas Ltd

Falcon Oil & Gas stacked with game changers

Falcon Oil & Gas's relationships with Hess, Chevron and Gazprom and a programme of up to 18 wells gives investors in the newly-listed AIM company a lot of potential for their money.


“You get a lot of bang for your buck,” says Philip O'Quigley assessing the potential of his company, Falcon Oil & Gas (LON:FOG CVE;FO).

Over the course of our 45-minute briefing, one that has taken us from Australia, to South Africa and then to Hungary, he constructs a compelling investment case ahead of the TSX-listed group’s debut in London and Dublin this week.

Falcon has relationships with Hess, Chevron and Gazprom and a programme, if fully executed, that adds up to a possible 18 wells, or US$400mln-worth of investment.

The group has management of real pedigree. Chief executive (CEO) O'Quigley is former finance director of Providence Resources, the poster-child for Ireland’s emerging oil and gas industry, while his chairman is John Craven, the guiding light behind Cove Energy.

Cove, you will remember, was sold to Thailand’s PTT Exploration & Production for £1.22bn. And the Falcon model owes much more to Cove than Providence in the sense that Falcon wants to be a large minority shareholder in any discovery, but certainly doesn’t want to be the operator.

The assets come with a history dating back to 2005, says O'Quigley.

Craven, who came on board in 2011, has given the strategy some coherence. The CEO, meanwhile, has put Falcon’s costs on a more realistic footing and is charged with delivering value from its unconventional oil and gas assets by leveraging off major and even super major oil companies.

All three properties are potential game-changers, though the one nearest to crystallising value is Falcon Oil & Gas Australia.

It holds four exploration permits covering seven million acres of the highly prospective Beetaloo Basin in Northern Territory.

The potential resource is 162 trillion cubic feet of gas and over 21bn barrels of oil, according to RPS Energy, which compiled the group’s competent person’s report.

It has a joint-venture with Hess that covers 6.2mln acres. The American giant has already paid US$20mln upfront, shot 3,500 kilometres of seismic data at an estimated cost of US$60mln and still doesn’t have its name on the licence.

Hess has until 30th June 2013 to elect to drill five wells at an estimated further cost of US$75mln, at which point it will take a 62.5% stake.

There is no guarantee the American giant will exercise its option. Hess, of course, is embroiled in a bruising battle with an activist investor, which has only served to heighten the uncertainty over the Australian deal. However, O’Quigley remains confident.

Another deal to be done is the farm-out of the nearby Shenandoah and EP99 licences not subject to the Hess agreement. This is a hidden value driver that could have a big impact on Falcon’s valuation.

“The interest I’m getting for these assets is immense,” reveals O’Quigley. “I could take out an insurance policy and farm out now, but I will wait until July (after the Hess decision).”

Currently, Falcon’s land holding in Oz is valued at around US$13 an acre. Contrast that with the $813 an acre paid last month by Chevron farming into 810,000 (gross) unconventional acres owned by Beach Energy.

Beach attracted the interest from Chevron after drilling just six vertical wells and one vertical – one fewer than Hess plans. Beyond that the appraisal value can go as high as US$4,000 an acre.

In South Africa, Falcon holds a technical co-operation permit (TCP) covering 7.5mln acres of the Karoo Basin estimated to contain an eye-popping 485 trillion cubic feet (TCF) of shale gas.

Shell owns the adjoining TCP, while Falcon has an exclusive co-operation agreement with Chevron, which came with a US$1mln contribution to past costs.

The process of turning that technical co-operation permit into an exploration licence was thwarted by a moratorium on development of the Karoo put in place in 2011.

However, there is every indication the group will receive the green light in the second half of the year, following an announcement by the government in September 2012 of its intentions to lift the moratorium. Only at this point will Falcon look to farm down its position in South Africa.

In Hungary, the company holds a 245,775-acre licence in the Mako Trough, around 10 kilometres from the prolific MOL-owned and operated Algyo Field, which has produced 2.5 TCF of gas and 220mln barrels of oil to date.

Seven wells were drilled into the deeper unconventional play that encountered hydrocarbons, but it was never fully developed by the previous management.

Three wells will be drilled this year by Gazprom subsidiary NIS at a total cost of US$20mln, with Falcon fully carried.

However, the Russians will target the shallower, potentially gas bearing targets that show up as AVO anomalies (hot spots) sitting right above the hydrocarbon source kitchen for the whole area.

“If this works it is a game changer; there is a gas pipeline nearby and all the infrastructure we need,” said O’Quigley.

The deeper-lying unconventional play below isn’t covered by the NIS deal, leaving Falcon to find a partner willing to invest heavily (US$25m initially) to land the big prize – an estimated 35.3 TCF of gas and 76.7 million barrels of oil. “You won’t see Falcon spending a dollar on this,” says the company’s chief executive.

The AIM-listing will add US$25mln to Falcon’s coffers, US$10mln of which will be used to repay debentures due in June. A total of US$5mln has been set aside to meet the group’s work commitments, leaving US$10mln for “general corporate purposes”.

Dublin-based Dolmen Stockbrokers reckons the fund raise creates a cash cushion that may even allow Falcon to make “opportunistic acquisitions”.

Analyst Bryan Mattei reckons Falcon is worth 33 cents a share, a 50% premium to the current share price. This, he admits, is a conservative assessment of business’s true worth.

“The valuation is heavily dominated by Hungarian and Australian assets,” he adds. “However, there remains considerable upside potential for South Africa given Falcon’s large acreage, its partner Chevron, and vast resource estimates for the Karoo basin.”

Quick facts: Falcon Oil & Gas Ltd

Price: 8 GBX

Market: AIM
Market Cap: £78.55 m

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